VIX-futures ETN sets fresh low after brief Goldman spike

By John Spence

At least that’s what an exchange-traded note following VIX futures is telling investors now after a short-lived rally last week when the SEC announced civil fraud charges against Goldman Sachs.

The iPath S&P 500 VIX Short-Term Futures ETN (VXX) jumped 4.8% on Friday on record trading volume of about 22.3 million shares after the SEC announced its case against Goldman. The news spooked investors and the Dow shed about 126 points as lingering worries over the debt crisis in Greece helped fuel the selling.

Yet the Goldman concerns seem to have faded rather quickly into the rearview mirror, judging by the action in VXX this week. The ETN is designed to provide investors with exposure to near-term futures contracts based on the market’s so-called fear gauge. Therefore, like the VIX itself, it provides a real-time barometer of market sentiment. (The VIX measures implied market volatility using options contracts based on the S&P 500.)

VXX was introduced in January 2009, which means it missed the big VIX spike in late 2008 as the credit crunch roiled global markets. Almost since its launch, the ETN has been in a long, slow descent. Factoring in today’s pullback, VXX has lost more than 80% of its value over the past year.

“Whether you are a futures investor looking at the CBOE VIX index or an exchange-traded fund trader looking for a bottom in the VXX … the search for higher market volatility has been far from rewarding,” said ConvergEx Group in an April 13 research note. “Now if you showed the average trader a chart of the VIX but told them it was a stock, we suspect most market-savvy folks would say, ‘That thing is going to zero.’”

Indeed, VXX set a new all-time low of $18.51 a share on Tuesday as stocks were climbing for the second straight day. Its 52-week high is $101.07, by the way. Yikes.

The ETN fell about 3% on Monday and is on track for a loss of more than 4% today, so last week’s fleeting gain has already been wiped out and then some.

VXX is billed by some as a way for investors to hedge their stock portfolios against pullbacks, because the VIX jumps in times of distress. However, investors need to keep a couple of things in mind with this ETN, which is issued Barclays and has a market capitalization of more than $1 billion.

First, because it follows VIX futures and not the spot index, it tends not to jump as high when the VIX itself rallies. For example, on April 16 when the Goldman news hit, VXX rose just under 5% while the VIX jumped more than three times as much with a 15.5% gain, according to FactSet.

Also, the VIX has seen extended periods of flat performance, punctuated by relatively brief spikes during crises.

“Unfortunately, it is also a strongly mean-reverting asset class, so it produces zero long-term return,” says Morningstar analyst Bradley Kay. “Any sizable stake in volatility will produce a commensurate drag on returns even as it damps the portfolio’s risk.”

Still, much like inverse ETFs, a well-timed bet on VXX could provide sanctuary if markets go haywire again. It just hasn’t worked so far.